Saturday 29 August 2015

National economies are not the same as family budgets

When I heard that the director of the Confederation of British Industry (CBI) had attacked Jeremy Corbyn's plan to use direct quantitative easing to fund infrastructure investment, my immediate thought was 'of course he did',. Under John Cridland's leadership the CBI has become a pressure group for George Osborne's extremist ideological austerity agenda and promotion of the interests of the UK establishment.

It was only a few days later that I took the time to read what his actual criticism was. I knew that Cridland and his mates at the CBI must be economically naive, given their undying support for ideological austerity, despite the fact that it has resulted in the slowest post-crisis recovery in economic history, but the sheer economic illiteracy of Cridland's criticism of Corbyn's direct QE policy is still utterly astonishing.

One of the assertions Cridland made during his attack on Jeremy Corbyn's economic plans was that "We all know that household finances and government finances are the same". Not only is the assertion that national economies are equivalent to household budgets a demonstration of utter economic ignorance, the assertion that this idiocy is something that "we all know" just goes to show how much of an ideological bubble austerity fetishists tend to live in. They're so ideologically insulated that they cannot even conceive the idea that there's even anyone out there who doesn't believe in the simplistic and misleading economic fairy stories they hold to be self-evidently true.

Why government finances are not like household budgets

There are many reasons that government finances are not like household budgets. I'm going to outline nine reasons, but this list is hardly exhaustive. If you put your mind to it I'm sure you could think of several more ways in which family budgets differ from national economies.

Issuing currency
The most commonly cited difference between national economies like the UK and US and ordinary family budgets is the fact that nations with central banks have the ability to create more of their own currency, while law abiding families do not have the ability to print their own money.
Legislative power
Another major difference between national economies and family budgets is the fact that nations have the ability to write new laws to restructure their economies, while families have to comply with laws that are imposed externally. 

A national economy relies upon taxes imposed upon its citizens for income. A marginal rise in income taxes would increase the nation's spending power. A household budget generally relies upon wages, meaning a marginal rise in income taxes would cause a fall in family spending power. 

Controlling interest rates

Nations with their own central banks can use monetary policy to control interest rates. For example the Bank of England has held the interest rate at an all-time record low of just 0.5% for seven long years. Families do not have any control over interest rates. 

Issuing bonds
Nations borrow money by selling bonds. In the current economic climate yields on UK government bonds are very low, but they are considered very safe investments because the UK is considered highly unlikely to go bankrupt. The majority of government bonds are held by pension funds and insurance companies. Families have no ability to issue low interest bonds to pension funds and insurance companies in order to raise money, they generally have to borrow from commercial banks, building societies, payday loan companies, or, if they're really lucky, from wealthy relatives.

Geographical constraints
The first five points have been areas in which national economies have distinct advantages over household budgets, but when it comes to location, it is clear that the family unit has a distinct advantage over the modern national economy because they have the ability to move location. If a family is struggling to make ends meet they can downsize to a smaller house, or move to a more prosperous area to seek work. Nation states cannot geographically downsize, or simply move location to a more prosperous part of the world.

The nation state lasts an awful lot longer than the typical family unit. The United Kingdom has existed since 1707, but many of its institutions are much older. The typical family comes to an end after a few decades after the adult members die, it's assets are disbursed and its debts are written off. The only type of family that has similar longevity to nation states are royalty and the aristocracy, where land, wealth and titles are handed down the generations. The vast majority of family budgets do not benefit from enormous hereditary wealth in this way, so the comparison would show how absurdly out-of-touch Cridland is if he's trying to draw parallels between the UK economy and the spending habits of the landed gentry rather than ordinary people.

The typical family unit has a linear demographic progression as the members of the family grow older, until the children grow up and leave the family home, then eventually the adults retire. If nation states had similar demographics to the typical family, the majority of adolescents would emigrate, and the entire UK workforce would retire after a few decades.

Another huge difference between a national economy and a household budget is the way that money is spent. The majority of spending a nation state does is happens internally within the national economy (investment in infrastructure and services, employment, payment of social security etc) while the majority of spending the typical family does is external and flows out of the family unit (payment of taxes and bills, buying food, fuel, clothes etc). If family budgets were like national economies as economically illiterate austerity fetishists like to claim, the majority of family spending would constitute internal investment not external spending.

John Cridland is making the CBI a laughing stock

The Confederation of British Industry claims to be an apolitical business lobby group, but in recent years it has become one of the most vocal cheerleaders for the interests of the Westminster establishment and for 
George Osborne's socially and economically destructive ideological austerity agenda

John Cridland's politically partisan attack on Jeremy Corbyn's economic policies is not the first example of the CBI leadership showing their political bias. A previous example came when they signed up as official supporters of the campaign against Scottish independence without even bothering to consult their Scottish membership first, which caused an exodus of Scottish member organisations.

Not only have the CBI clearly given up any right to claim political neutrality, John Cridland's assertion that "we all know that household finances and government finances are the same" is a crystal clear illustration of the fact that the most powerful business lobby group in the UK is headed by an economic illiterate.

Surely some of the thousands of businesses, trade associations and individuals who are members of the CBI must be worrying that their Director General is making them look utterly foolish with his politically partisan and economically illiterate opinions. I mean, what kind of serious organisation allows their senior staff to embarrass their members by rambling on incoherently about subjects which they blatantly don't understand?

 Another Angry Voice  is a "Pay As You Feel" website. You can have access to all of my work for free, or you can choose to make a small donation to help me keep writing. The choice is entirely yours.

Austerity is a con
Jeremy Corbyn: the more they attack him the stronger he becomes
The Tory "economic recovery" mantra is a lie
George Osborne has created more debt than every Labour government in history combined
How Ed Balls' austerity-lite agenda ruined Labour's election chances
The Tory ideological mission
Asset stripping "bankrupt Britain"
Margaret Thatcher's toxic neoliberal legacies

No comments: